Thursday, June 10, 2010
Steven Davidoff (Connecticut/OSU), Eric Chaffee (Dayton) and Barbara Black (Cincinnati) have organized what we are rather ambitiously calling the First Annual Midwest Corporate Scholars Conference, to be held at the University of Cincinnati College of Law on June 22. For the inaugural conference, we thought to solicit participation from corporate law professors at Ohio law schools, with a view toward expanding our targeted market in future years. To that end, Eric has planned a full day's program with a number of presentations from Ohio law professors on a variety of topics related to corporate and securities law.
We extend an invitation to all corporate law scholars who wish to travel to Cincinnati to attend. If you want to attend, just send me an email (email@example.com) so that I can arrange for sufficient food (continental breakfast and box lunches). If you would like to present a paper, while the program is quite full, you may be able to negotiate that with Eric Chaffee (firstname.lastname@example.org). Contact any of us if you want further information about anything else.
We hope to see you in Cincinnati on June 22!
The SEC said it would act fast, and it did: today it approved rules that will require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period. The rules, which were proposed by the national securities exchanges and FINRA and published for public comment, come in response to the market disruption of May 6.
The SEC anticipates that the exchanges and FINRA will begin implementing the newly-adopted rules as early as Friday, June 11. Under the rules, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which would apply to stocks in the S&P 500® Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010. The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.
"It is my hope to rapidly expand the program to thousands of additional publicly traded companies," stated Chairman Schapiro.
The SEC staff also will:
- Consider ways to address the risks of market orders and their potential to contribute to sudden price moves.
- Consider steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest.
- Study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules.
- Continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.
The SEC staff is working with the markets to consider recalibrating market-wide circuit breakers currently on the books — none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.
Wednesday, June 9, 2010
Outsider Hacking and Insider Trading Under Section 10(b) of the Securities Exchange Act: The Impact of the Second Circuit's Decision in SEC v. Dorozhko, by James A. Jones II, University of Washington - School of Law, was recently posted on SSRN. Here is the abstract:
In January 2008, the Federal District Court for the Southern District of New York held that trading put options of a company’s stock based on inside information allegedly obtained by hacking into a computer network did not violate antifraud provisions of federal securities law. The court ruled that the defendant’s alleged “hacking and trading” did not amount to a violation of Section 10(b) and Rule 10b-5 because there was no proof the hacker breached a fiduciary duty in obtaining the information. The Second Circuit recently overturned the District Court’s decision, finding that a breach of fiduciary duty was not required for computer hacking to be “deceptive.” Having established that the Securities and Exchange Commission need not demonstrate a breach of fiduciary duty, the Second Circuit remanded the case to the District Court to determine whether the computer hacking in the case involved a fraudulent misrepresentation that was “deceptive” within the ordinary meaning of Section 10(b). This article evaluates the Second Circuit’s decision in SEC v. Dorozhko in light of the assumption that liability under the misappropriation theory requires a breach of fiduciary duty. This article also explores the implications of the Second Circuit’s decision and provides practice pointers to assist attorneys in advising their clients regarding the use of confidential information in connection with the purchase or sale of securities.
Territoriality as a Regulatory Technique: Notes from the Financial Crisis, by Chris Brummer, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
For all of the attention brought to bear on global financial regulation, relatively little scholarly energy has been directed towards thinking through the mechanics of how national regulators govern international pools of capital via their domestic rulemaking authority. Instead, where the international implications of domestic regulatory processes are considered, they are generally associated with the broader “conflicts of law” literature that focuses on how courts determine which law is to be applied where different governments assert jurisdiction. Few, as a result, have examined territoriality as a regulatory strategy.
This Essay responds to this weak link in the literature by providing a short conceptual overview of the operationalization of supervisory power by national regulatory authorities. It shows that “territorial” authority in financial regulation – long considered the source and limitation of a country’s regulatory power – in practice constitutes a diverse array of tactics employed by national authorities to exert authority over often mobile market participants. As such, territoriality provides the means by which regulatory power is projected beyond national borders, especially for countries enjoying large capital and customer markets.
The Essay then contextualizes territoriality against the backdrop of financial globalization and shows how the “rise of the rest” changes the international regulatory order as other countries have developed their own liquid financial centers and means of (extra)territorial influence. Specifically, the Essay argues that as emerging markets have become more important, the costs of unilateral territorialism and non-cooperation by traditionally dominant countries have increased, which has helped spur new efforts at international coordination, as well as innovative initiatives aimed at leveraging hard and soft power to promote national policy preferences abroad. Nevertheless, the Essay concludes that territoriality remains a central element in international coordination and the bargaining process.
Corporate Governance Reform in a Time of Crisis, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN. Here is the abstract:
In this article I argue that crisis-driven corporate governance reform efforts in the United States and the United Kingdom that aim to empower shareholders are misguided, and offer an explanation of why policymakers in each country have reacted to the financial crisis as they have. I first discuss the risk incentives of shareholders and managers in financial firms, and examine how excessive leverage and risk-taking in pursuit of short-term returns for shareholders led to the crisis. I then describe the far greater power and centrality that U.K. shareholders have historically possessed relative to their U.S. counterparts, and explore historical and cultural factors explaining this distinction - notably that the more robust U.K. welfare state has deflected political pressure to accommodate non-shareholders' interests within the corporate governance system, while the opposite has occurred in the United States. This, I argue, looms large in the observed crisis responses. The U.K. initiatives reflect reinforcement of the more shareholder-centric status quo, while the U.S. initiatives reflect a populist backlash against managers, fueled by middle class anger and fear in a far less stable social welfare environment. I conclude with a discussion of corporate governance challenges facing U.S. and U.K. policymakers following the crisis.
Barriers to Effective Risk Management, by Michelle M. Harner, University of Maryland School of Law, was recently posted on SSRN. Here is the abstract:
“As long as the music is playing, you’ve got to get up and dance. We’re still dancing.**
This now infamous quote by Charles Prince, Citigroup’s former Chief Executive Officer, captures the high-risk, high-reward mentality and overconfidence that permeates much of corporate America. These attributes in turn helped to facilitate a global recession and some of the largest economic losses ever experienced in the financial sector. They also represent certain cognitive biases and cultural norms in corporate boardrooms and management suites that make implementing a meaningful risk culture and thereby mitigating the impact of future economic downturns a challenging proposition.
The global recession highlighted significant failures in firms’ risk management practices. These failures implicated weaknesses not only in firms’ financial risk modeling but also the human/governance side of risk management. Unfortunately, fixing the former might be significantly easier than attending to the latter. Studies suggest that cognitive biases, including confirmation bias, overconfidence/optimism bias and framing, can impair a board’s and management’s ability to assess risk accurately. These problems are compounded by the typical incentive structure and the “winner-take-all” mentality adopted by many corporations in the United States.
This essay analyzes the potential benefits of improved risk management practices, commonly called enterprise risk management (ERM), and the potential barriers to implementing meaningful ERM at U.S. firms. ERM is an integrated risk management framework that seeks to improve knowledge of and communication about potential risks throughout the firm, starting with the board and senior management team. Indeed, the board and senior management team are vital to creating a risk culture. The essay considers the impact of boardroom dynamics and U.S. corporate culture on risk management practices. The essay further considers whether regulation or a different approach is needed to encourage U.S. corporations to invest the necessary human capital in meaningful ERM.
On June 9, 2010, the SEC sued William G. Mortensen, the former CFO of Texas-based Advanced Materials Group, Inc. ("AMG"), in U.S. District Court in Dallas for fraudulently inflating AMG's publicly reported financial results over multiple quarters in 2008 and 2009. The Commission charged that Mortensen committed securities fraud, lied to accountants, falsified records and circumvented internal controls, and aided and abetted reporting, record-keeping and internal control violations. The Commission also alleged that Mortensen misappropriated hundreds of thousands of dollars from AMG to pay personal expenses.
The Commission also charged one of Mortensen's subordinates, Feng "Eric" Zheng, with lying to accountants, falsifying records and circumventing internal controls, and with aiding and abetting securities fraud and reporting, record-keeping and internal controls violations.
With respect to Mortensen, the Commission seeks civil penalties, disgorgement of misappropriated funds, a permanent bar from serving as a public company officer or director, and permanent injunctive relief. The litigation against Mortensen is continuing.
Zheng has settled the Commission's charges. Without admitting or denying the Commission's allegations, Zheng has consented to a $25,000 civil penalty and a permanent injunction against future violations of the antifraud, lying-to-accountants, reporting, record-keeping and internal controls provisions of the federal securities laws.
The SEC has announced an Open Meeting for June 16, 2010. The subject matter will be:
The Commission will consider whether to propose amendments to rules 156 and 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940 to address concerns that have been raised about target date retirement fund names and marketing materials.
Monday, June 7, 2010
The Financial Crisis Inquiry Commission announced that it issued a subpoena to Goldman Sachs & Co. for
failing to comply with a request for documents and interviews in a timely manner. According to its statement:
In seeking documents and testimony from public agencies and companies, the Commission has
made it clear that it is committed to using its subpoena power if there is a lack of, or delay in,
compliance. Failure to comply with a Commission request is viewed with the utmost seriousness,
as the Commission will not be deterred from getting desired information.
In creating the Financial Crisis Inquiry Commission under the Fraud Enforcement and Recovery
Act of 2009, Congress granted the Commission the power to “require, by subpoena or otherwise,
the attendance and testimony of witnesses and the production of books, records, correspondence,
memoranda, papers, and documents.”